After a decade of writing about the crisis, we are now subjected to an orgy of yet more chatter with not much insight. It speaks volumes that the likes of Ben Bernanke, Timothy Geithner, and Hank Paulson are deemed fit to say anything about it, let alone pitch the need for the officialdom to have more bank bailout tools in a New York Times op-e titled What We Need to Fight the Next Financial Crisis.
The fact that they blandly depict crises that demand extraordinary interventions as to be expected confirms that greedy technocrats like them are a big part of the problem. Their call for more help for financiers confirms that they have things backwards. How about doing more to make sure that future crises aren’t meteor-killing-the-dinosaurs level events, and foisting more costs and punishments on the financiers who got drunk and rich on too much risk-taking? The first line of defense should be stronger regulations, including prohibition of certain activities.
As the Financial Times’ Martin Wolf pointed out in a recent crisis retrospective, the response of central bankers and financial regulators to the crisis was to restore the status quo ante, and not engage in root and branch reform, as took place in the Great Depression. But as we’ve pointed out, the response to the crisis represented the greatest looting of the public purse in history. The post-crisis era of super-low interest rates represented an additional transfer of income from savers to the financial system. In the US, the so-called “get out of massive mortgage securitization liability for almost free” card otherwise known as the National Mortgage Settlement represented a not-widely recognized second bailout of banks and mortgage servicers. No wonder banksters are seeking a rinse and repeat.
An overfinancialized economy is good for no one save banksters and their paid retainers. Economists in recent years have been describing how larger financial systems hurt growth. For instance, the IMF found that the optimal development of a financial system was roughly where Poland is. The IMF conceded that it might be possible to have a larger banking system not drag down the economy if it were well regulated. Other studies have found that economies with large financial sectors typically have more inequality, and inequality is separately seen as a negative for growth. So there’s no sound policy reason to coddle banks rather than cut them down to size.
But the winners get to write the histories, and the friends of Big Finance came out on top. Despite the press occasionally listing the economists like Michael Hudson and Steve Keen who saw the crisis coming, they have only marginally higher profiles now than they did a decade ago. Nassim Nicholas Taleb wrote bestsellers, yet his blistering descriptions of how financial risk analysts and managers are intellectual frauds has had virtually no impact on practice.
Similarly, Andy Haldane, the Bank of England’s executive director of financial stability, is often called one of the most creative and insightful economists of his generation, but his studies and speeches on what went wrong and what might be done, like forcing more specialization and diversity among financial firms, are regularly praised in academia and the press and ignored as guides for reform.1
And none other than the New York Fed’s William Dudley came up with a way to bring partnership-type incentive structures back to big banks by requiring executives and producers to have a high percentage of their bonuses retained in the firms as a type of junior equity to be the first funds tapped in the event of losses or large legal settlements. Not only would this lead key players to be far more concerned about risk, but as Dudley pointed out, it would also lead everyone to be far more concerned if they saw another business unit engaged in dodgy practices that they might wind up paying for, and apply pressure to have them shut down. Predictably, this idea made far too much sense to get any traction.
By contrast, Bernanke was a true believer in the Great Moderation, the mid-2000s self-congratulatory mainstream economist view that they had produced the best of all possible worlds. Bernanke in fact continued the so-called Greenspan put which incentivized investors and bankers to take on financial risks, since they knew if anything bad happened, the Fed would rush to their rescue. The Fed, and Bernanke in particular, were badly behind the curve. In May 2007, Bernanke said that subprime was contained, and in July 2008, gave Fannie and Freddie clean bills of health.
Geithner, when he was head of the New York Fed, did acknowledge that the brave new world of slicing, dicing, and distributing risk might make it more difficult to manage a crisis, but then insisted that there was no way to roll the clock back. Linear projections of trends is naive but a great excuse for inaction. Geithner said nary a peep when banks who had just been bailed out gave a raised middle finger to the American public by paying their executives and staffs record bonuses in 2009 and 2010 rather than rebuilding their balance sheets. The Bush Administration considerately left $75 billion of TARP monies unspent for the Obama Administration to use to fund mortgage modifications. Funny how the Treasury never took that up. Instead, Geithner instituted supposed mortgage assistance programs like HAMP whose purpose, as Geithner put it to SIGTARP head Neil Barofsky, was to “foam the runway” for banks by spreading out when foreclosures would happen rather than preventing them. Recall that 9 million homes were foreclosed upon. Many had missed only a payment or two due to job loss or hours cutbacks; some were victims of bad servicing. Giving borrowers with viable levels of income mortgage modifications would have been a win for investors too. But the Treasury never cared about borrowers and convinced itself that taking care of banks would help the real economy, in a Wall Street variant of trickle-down theory.
And Paulson? Although he wasn’t on the scene as long as Bernanke and Geithner, recall that Treasury staffer Neel Kashkari whipped up a 50,000 foot “How do we deal with a crisis” think piece that Paulson & Co. deemed to be just terrific and tossed in a drawer. Recall that Paulson’s first TARP proposal was a mere 3 pages demanding $700 billion, more than the hard costs of the Iraq War, and even worse, put the Treasury beyond the rule of law with this provision:
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
At the time, we called it a financial coup d’etat.
So the bailer-outers-in-chief are keen to prescribe more of what they foisted on the American public. It should come as no surprise that they didn’t pump for stronger financial reforms, were perfectly content to allow the Fed to authorize banks subject to stress tests to pay dividends and bonuses rather than have them build up much bigger capital cushions, and in Bernanke’s case, call for a resumption of austerity policies in 2012.
Each one of this terrible trio has a much longer rap sheet. But the mere fact that they have the temerity to subject the public to their cronyistic blather, and worse, the New York Times dignifies it, shows that, as Talleyrand said of the Bourbons, that policymakers and pundits have learned nothing and forgotten nothing.
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1 Haldane, with former Bank of England governor Mervyn King and Adair Turner at the FSA, did fight hard for a Glass-Steagall type bank breakup, but the UK Treasury succeeded in watering down their proposal to mere ring-fencing.
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MMT for the right kinds of people? Yes, not all the people can be fooled all the time, but enough of them can be.
Geithner cured me of calling myself a Democrat. That little pipsqueak is worse than Paulson. To be fair, his boss was famous for his awesome awesomeness.
Actually, Obama cured me of being a Democrat…..for appointing Geithner!
The Democrat Party is a disease in need of a cure. It functions purely as a rear-guard action against the left.
That was the time I gave up leading a local county democrat group, when the incoming Obama brought all those financial thieves in with him. I was appalled but expected nothing more. They were the “financial crazies” as we had the “foreign policy crazies”.
So I imagine your not keen on Obomber stumping in California for state Democrats: telling the populace that Trump is a symptom of the electorates indifference. Rich, ain’t it!!! Obama telling more lies that he was a man of/for the people. Utter Bullshit. Obama did little for regular folks.
Obama’s crowd were the NPR tote-bag set. He knew his marks.
I too ran from the Democratic Party around the same time and was not surprised to see the tiny text in the DODD FRANK financial “protection” law that allows “bail in” to the bank accounts of the American people in the next financial crisis. The democrats have a pattern of naming bills opposite of what they intend…this should be listed ed as a felony. The real message is that they get to play and we have to pay. If you have large sums of cash in any FEDERAL RESERVE bank you need to take it out and do something concrete with it to protect yourself.
Such as move it to a credit union??
That’s what I did during the move your money campaign all those years ago. The service has been good and the high yield savings APR is substantially better than at one of the big banks.
In an attempt to recover some of the bailout funds for myself, yearly I open a new account at one of the big banks just for the bonus and then drain my funds as soon as I’ve had the account open the minimum to avoid any penalties. At this rate, I calculate I’ll have captured my portion of the bailout funds in 432,208,098,071 years.
Can you please identify what portion of Dodd Frank has this inflammatory language?
Thank you for the info!
Free money is the best kind, experts agree.
Every dollar printed is an instrument of DEBT ON THE US population…your children and grandchildren will be paying it back unless President Trump finds wrongdoing at the fed reserve and then only then he can use the executive order he signed in December 21, 2018 to charge the fed with crimes and confiscate all their assets and wipe out our total debt! Yes this is my idea I did not hear this anywhere else and yes maybe I am prone to fantasy…but….wouldn’t that be GRAND!
Read Wray’s MMT book.
i think it was his awesome boss that cured me. i was bothered by his reversal on the f.i.s.a. court, but with his mandate and the two houses of congress, i thought we were finally going to get a lot of needed changes. silly me.
Right there with ya. The bailout built the coffin for my life as a Democrat voter, and Obamacare pounded in the nails. Thanks for this piece, Yves!
Me too —the democrats seem to have a huge problem with conflating the professed intentions of their actions with the consequence of their actions. At least the republicans are at somewhat transparent as the party of the wealthy.
The democrats are a joke…
Me three :-(
bravo!!!
I remember reading about Napoleon Obamaparte in the New Yorker maybe in 2003 or 2004, and thinking, wow, a guy my age that could talk the talk, what if they let him walk the walk, and once Timbabwe was announced, the plank look on my face spoke volume in that we’d been had.
time to call for nationalization of the big banks.
Whenever I talk to a friend of 45 years…..about anything financial… he immediately dismisses me with long complex sentences because he worked for the federal reserve for 25 years…after all what could a doctor possibly know? This week I asked him the following and he fell silent for the first time in 45 years! Did you ever think that Trump is messing with all these trade deals in an effort to dismantle the fed reserve? Yup I finally made his brain burn….this tells me I might be on to something. Remember the court jester is often the smartest one in the kings castle. As you all may know GAME OF THRONES has aN adorable witty version of this character to study.
Read Wray’s MMT book. He considers the Fed to be a part of the US Government, specifically the treasury.
One can abolish the name of the Fed. One cannot abolish its function.
I think that’s a tremendous observation. The function of the federal reserve is inalienable from the system of commerce as it stands. Taking it apart without a major overhaul of commercial systems is impossible, therefore it’s not gonna happen so long as these bourgeoisie swine run the show and profit from it. They will bloviate about it until the universe succumbs to heat death but will do nothing substantial to change it.
It’s worth mentioning that the Orange Menace has taken similar actions, i.e. his “abolishing” NAFTA, by replacing it with an agreement that does virtually nothing to protect American either American or Mexican workers from the ravages of labor arbitrage. That overgrown rotten tangerine profited beautifully from this system (at least until he was stupid enough to air his dirty laundry in the public square), so why would he seek to change it on behalf of the same kind of poor peons that he and his parasitic family have been bilking for generations?
I read both Wray’s Seven Deadly Sins . . . and am half way through The Creature from Jekyll Island. Both are convincing, but Jekyll Island understands the workings of fiat currency while saying that “printing money” manifests badly in a hidden tax (inflation). MMTers would argue that we are real resource constrained NOT fiat currency constrained. Even Wray argues things that many MMTers may disagree with (e.g., a trade deficit is inherently a good thing – trading fiat paper for real goods).
Anyways, Jekyll Island argues that the Fed is a private instrument for the [big] Banker Cartel while as you said, Wray argues that it just an extension of the Treasury.
I am wondering if anyone else read Both books and is able to shed light on the often congruent but at times disparate persuasions… especcially with respect to the Fed.
> Anyways, Jekyll Island argues that the Fed is a private instrument for the [big] Banker Cartel while as you said, Wray argues that it just an extension of the Treasury.
Gramsci argues that the state and civil society can only be separated as objects of study….
That’s what should have been done instead of bailing the banks out. And the CEOs of the banks should have been jailed.
You might say that this was one time the government came quickly to the aid of 3,000 Puerco Ricans.
Does all this mean that Ben Bernanke, Timothy Geithner, and Hank Paulson are now the new “The Committee to Save the World” (http://content.time.com/time/covers/0,16641,19990215,00.html)? Are Rubin, Greenspan and Summers too busy now? Ah, what memories-
https://www.youtube.com/watch?v=fT-r-CzKfes
Thanks for this post.
Here’s a recent Guardian column that adds some more detail on the The City’s response back then, and its ongoing negative effect on the real economy.
https://www.theguardian.com/commentisfree/2018/sep/05/ten-years-financial-crash-lehmans-austerity-debt
Also, let’s not forget how this crew turned everything that failed into a zombie bailout vehicle since they knew they could never go to Congress again and the Fed’s ability to shovel money at banks just, well, needed a bigger shovel.
Those docs produced from the Hank Greenberg bonus lawsuit revealed how the top brass under Obama turned AIG into a stealth bailout vehicle to funnel yet MORE money to the biggest, shakiest banks.
Recall, the same was done with the GSE’s, Fannie and Freddie. All those Pooling and Servicing Agreements from every MBS deal ever put together with GSE’s as Guarantor always allow for the putback of deliquent mortgages on the underwriters. That means all those tax payer losses that the GSE’s socialized onto their own balance sheets could and should have been borne by the big bank stakeholders. The FHFA policy as mandated by Obama was never to demand the banks take back their fraudulent mortgages and make the GSE’s whole. Just another stealth bailout vehicle and more subversion of democracy, transparency, and accountability.
Bill Black has told anyone who’ll listen about the endless evidence of fraudulent underwriting and always ZERO prosecutions and never more than nominal fines to go with them.
There are 52 thousand sealed indictments created since Trump was elected….and as of this moment that we hope many of them will include some of these banister criminals. Their is a good probability that many of these indictments will be acted upon during an OCTOBER SURPRISE before the 2018 mid-term elections. The average number of sealed indictments per year is 1000 and Sessions pretends he is a lame duck ATTY GENERAL…. GITMO has been EXPANDED and military trials are a topic of interest brought up during Supreme Court nominee hearings…you do the math.
If the Attorney General has indeed created 52 thousand of sealed indictments for 2018, compared with the 1000 of a normal year — why are you able to hope some of them may target bankster criminals? And did I detect glee at contemplating the military trials you say were “a topic of interest brought up during Supreme Court nominee hearings”? What do you expect all these ‘signs’ mean? If true I don’t think these are at all optimistic or happy tidings.
LOL, no such surprise and the GOP is going down big in Congress come Nov and Im not even a Democrat saying so.
I’m a bit surprised that the Times allowed comments at all.
Maybe the editorial staff truly believes this stuff.
Of some encouragement is that while the Times readers seem to buy the “Russia, Russia, Russia” narrative, they are not buying this editorial.
Here is the top readers’ pick comment.
“Jazz Paw California Sept. 7”
“Unfortunately, these financial regulators rescued the bad actors and left the rest of the citizens for dead. It is entirely predictable that many would find that unfair.”
“Rather than propose a more equitable solution that helps the large majority of citizens who are blameless, this article argues for a repeat of the abuse we suffered in 2008.”
“While I agree that the financial system needs a wide array of tools to restore order, it needs to be coupled with punishing those who caused the damage and with measures to rescue the blameless. I don’t hear any of that here.”
That comment was far more civil than mine would have been. Example of good self-control.
The next bail out will be a bail-in like the one you saw in GREECE. Put your money into concrete monetary instruments…physical gold, silver, real estate. The next crash is overdue
I’ve opted for the 94 pound bags, although my wife is getting increasingly angry that she can’t park her car in the garage, on account of all that Portland laying there.
Just add water. Solid strategy.
But to whom will the galoshes fit ??
It has a poor shelf life due to the paper bags being permeable to water.
The shelves also have a poor shelf life. They tend to “get bent.”
I knew I should have taken her advice and put it all in myrrh instead.
I suggest buying a large quantity of oak barrels of good quality 1-year-old whisky to fill your garage. It worked for Joe Kennedy and will probably work again even without prohibition. On second thought you might be wise to buy barrels of different ages just to take into account the uncertainty in our time horizons. We may not have twenty years of the same world we know and love left to properly age the whiskey. It would be a shame to have to drink a green whiskey although even a green whiskey might have medicinal uses.
http://www.wondersandmarvels.com/2010/06/joe-kennedy-bootlegger.html
I remember reading a tale of a German fellow of means that didn’t like what he saw going on in the fatherland in the late 1930’s, and hightailed to Switzerland where he became a citizen, and brought his wine collection of about 1,000 bottles with him that saw his family through to the end of festivities, cheers!
In my opinion the NY TIMES=toilet paper and my invisible friends told me that their invisible friends are spooks
Wow, the could really use some proofreading. I noticed a glaring error right in the first paragraph –
I believe that last part should read “….with dire consequences for criminal bankers such as Geithner, Bernanke and Paulson.”
One can’t expect much of Geithner, having cheated on his taxes; that he wasn’t immediately disqualified for his appointment is telling. Only in DC is it a bigger deal to be caught employing undocumented workers for cleaning and childcare than failing to pay income tax. These people are openly shameless.
Anybody else notice the impeccable avoidance of the words “nationalize” and “socialize”? But it looks like we will get there by default to the only logical thing. Fiscal spending on an MMT scale. Nobody can stomach the thought of going back to boom and bust and the frivolous reliance on a “free market”. Does anyone continue to think that if we give everyone a guaranteed income that they will spend it wisely in some way? Not likely. Too disorganized and propagandized. A jobs guarantee will work, on the other hand, because it will target employment projects that improve society – things that everyone agrees are desperately needed. Likewise nobody thinks giving the banksters another bailout without some strict regulation of their activities is a good idea – it’s a proven nightmare. Because none of that money will improve society. None of it. Who do these guys think they are kidding? Several articles in the last few days point to this sea change in social expectations. The discussion between the twister Larry Summers and the sensible Joseph Stiglitz was an example of why what the bank bailers want is nonsense because contrary to Larry, secular stagnation doesn’t stagnate the important social improvements that are now critical. Larry is an unreconstructed idiot. And another article in Zero quoted Steve Keen on the problem of emergent phenomena – which are always social phenomena – which cannot be prepared for and therefore destabilize a fragile economy every time. And the discussion of risk by Marshall Auerbach. When the mismanagement of risk becomes absurd. And the latest bit today was an article discussing a former IMF Chairman who was recommending that the Fed directly buy the economy away from recession by buying stocks and goods, etc. We can rest assured nobody is going to say the S word yet – but it is there in all but word. Thank god for the social phenomena of widespread human disgust.
I think we can be confident that the US Government will eventually do the right thing.
We just need to be patient; currently they’re busy exhausting the alternatives.
Do you mean the far-right thing? If not then your faith in the US Government is indeed touching.
Won’t someone think of Sandy’s jet?
https://www.nytimes.com/2010/01/03/business/economy/03weill.html
It’s really going to smart when these people point to this article as some kind of vindication about foreseeing the next financial crisis. Or rather the next round of the crisis that they didn’t do anything to solve. I remember when British commenters openly mocked the Americans on NC who openly wished we had Mervyn King instead of Bernanke.
Ahh, memories.
Oh boy, Bernanke, Geithner and Paulson??!! About the only thing they’ve succeeded in is bailing out the banksters with $80 billion a month for years. During the next financial crisis – what can they take from us that they haven’t already? They’ve already taken all the mortgages and wiped out 200 years of history. No one owns anything anymore. No, the next step is for austerity and slavery (with the myriad agencies of secrecy), and war. Why can’t we just say no to war? We can hope higher level heads win out, but the neocons and neo-liberals are in control and they’re writing the history and the rules. I hope Bernie runs in 2020. Or that Trump gets hit on the head and smartens up and really does install a new Glass-Steagal and punishes the mortgage stealers and everyone else involved. Not likely to happen anytime soon. I fear for the future – but that’s about all I can do as I’m getting too old to care anymore, too old.
Problem solving involves two steps.
1) Understand the problem
2) Find a solution
Post 2008 – “It was a black swan”
We didn’t complete step 1, we are in trouble.
It wasn’t that hard either.
https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.52.41.png
1929 – US stocks (margin lending)
2008 – US real estate (mortgage lending)
They are called Minsky moments.
Glass-Steagall separated the money creation side of banking from the investment side of banking. It also stopped the money creation side of banking from trading in securities.
The people that put it in place knew what it did, the people that repealed it didn’t.
Without Glass-Steagall the bankers could create money to buy securities they produced themselves in a ponzi scheme.
This is what they did.
The next fiscal collapse may require more to repair the damage done than bales of money — no matter where that money is dumped. Old stories and tall tales have lost their play. Short of sharp ‘teeth’ what will keep the angry mobs at bay?
Interesting take on these sorts of shenanigans at Jesse’s Cafe Americain. It has a good Charlie Munger quote as follows-
“You should thank God for bank bailouts— absolutely required to save your civilization. So I think when you have troubles like that you shouldn’t be bitching about a little bailout. You should have been thinking it should have been bigger. You should thank God the government saved the big banks and their investors.
Now, if you talk about bailouts for everybody else, there comes a place where if you just start bailing out all the individuals instead of telling them to adapt, the culture dies. Suck it in and cope.”
Link at https://jessescrossroadscafe.blogspot.com/2018/09/stocks-and-precious-metals-charts-youre.html
The culture dies?? What about the culture of the rich and soon to be rich? They’re the ones that need slapping silly
This is a must read on the position of neoliberal democrats in blue states. They are allied with the health care industry blocking single payer and the import of drugs from Canada ( think Corey Booker.) Allied with the money lenders ( think Joe Biden and student loans and preventing relief by bankruptcy.) Preventing tax raises on the wealthy and preventing the correction of carried interest loopholes ( Connecticut democrats,) while cutting the pensions of public employees such as firefighters, police, and teachers ( Rhode Island ) while offering large sums to business such as Amazon. Shifting public pension savings to politically connected hedge funds with high fees and return less than stock index funds. In democratically controlled Colorado democrats have joined forces with republicans to prevent health care reforms and allow fossil fuel companiees to frack next to schools, hospitals and residentual areas. In New Jersey democrats who criticized Christie for not raising taxes on the financial elite are now preventing reform. Nancy Pelosi won’t consider medicare for all at all. Same with Hillary who said during her presidentual run that single payer never ever. Of course the bail out of the TBTF banks under Obama without conditions while shafting the victims of the mortgage crisis. This is why I see Trump as Obama’s legacy. Where can people turn when there is no party that represents them?
Here’s the link to the David Sirota op-ed.
https://www.theguardian.com/commentisfree/2018/sep/10/trump-neoliberal-democratic-party-america
The Great Depression was followed by FDR; our financial collapse was followed by Cheney – there’s a difference. It is also the case that the moneymen then were not immune to shame and disrepute as they are today. Now they have the representatives firmly in their pockets, they can hide behind high walls with dogs and security slaves and occasionally venture out to a private airplane to their private tropical island for hi-jinks with their peer group. Who cares what the little people say?
We need another bust but this time instead of sucking our teeth and saying ‘who would have thought it?’ we cancel the USD, JPY, EUR, etc. and dismantle the central banking system. Governments will re-issue a new means of exchange on a sliding scale depending on amount being changed. The ratio of exchnage will relate to the amount of economic activity. Government will issue the money to community banks of limited size. These will be small enough for our corrupt regulators to do their job or pay the price.
Geithner’s suggestion that there is no way to roll back the clock is precisely the thinking that should be excluded from financial regulation. That’s what everyone is doing today – trying to identify a way ahead from where we are when there isn’t one. We need to start over.
In Yves’ footnote she shows that its the politicians who sell impunity to the moneymen. That is where the task starts, in the representation. Our primary job will be to recover parliament before we can protect our income and standard of living. In the UK that could well be Corbyn and Charles III but if not it may require something fearsome and terrifying.
Welcome back from your break, Yves. I don’t claim to be keeping tabs, but the last one I recall you mentioning was a number of years ago? Hope this one was restful.
The NYT should be ashamed. The least they could do would be to invite a critique by a distinguished monetary policy expert, like Yves Smith. Otherwise they are merely a fish wrapper, spewing Wall Street propaganda. Sad.